Penn Wealth Publishing

2022.01.16 Penn Wealth Report Vol 10 Issue 01

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Copyright 2022. All Rights Reserved. 8 penn wealth Report volume 10 issue 01 16 Jan 2022 tactical Awareness It was just over a decade ago, in the aftermath of the bursting housing bubble and subsequent financial meltdown, that we first began hearing the narrative of younger generations shunning home ownership in favor of perpetual rents and leases. Banks began tight- ening loan standards and homeowners watched as their property values actually dropped (to more realistic lev- els, we would argue). According to the National Association of Realtors, home prices dropped a record 12.4% in the fourth quarter of 2008—the largest housing price decline in three decades. US home ownership rates plummeted from near 70% to 62.9% over the span of a decade; the exodus away from single family homes and to rent- als had begun. Looking at our own archives on the subject, back in 2014 we wrote of the sudden and quite astounding push by builders to develop multifamily properties at rates not seen before. New "city center" projects, which included rental units combined with office space and small shopping districts, were underway across the country. is movement peaked, according to the US Census Bureau, in 2017 when 294,800 apartment units were constructed. As leasing vacancies fell from 11% in 2009 to roughly half that in 2015, landlords were able to demand higher rates from renters. Traditional homebuilders, already battered by the financial meltdown, faced a real solvency crisis. Many smaller builders went out of business, while those which could weather the downturn were leery to begin costly new projects. Between March of 2006 and March of 2009, the SPDR S&P Homebuilders ETF (XHB) lost 82% of its value. e great housing comeback As is so often the case, just as the bears were roar- ing the loudest the great comeback began. As rates came down, stirring new demand, and the dearth of new construction caused supply constraints, the US median sales price for new and existing homes nearly doubled within a decade, to $407,700 and $360,800, respectively. Stories of millennials shunning home ownership suddenly vanished as young families began searching for their own slice of the American pie. While prices were rocketing higher, pleasing both sell- ers and builders, home buyers were finding that record low mortgage rates allowed them to buy larger homes with more amenities. When the pandemic hit with full force back in March of 2020, the market once again seized up. Suddenly, however, Americans were discovering a new sense of freedom as they were able to work from home. By summer, spurred by another drop in mortgage rates and a desire to make the most of this new hybrid work model, the race was back on. Fierce demand has led to a shortage of some 5.24 million homes in the country, up from half that level just three years ago. is housing shortage isn't just due to higher demand, however, or risk averse homebuilders taking a more cautious approach. New challenges have been added to the mix, with no quick answers in sight. As the global economy ramped back up with force, serious supply chain issues led to a lack of available building products. Labor shortages exacerbated the problem as build- ers couldn't find enough workers to construct the homes. A lack of supply, consumers flush with cash, and a flood of new buyers has led to an inevitable economic condition: the highest level of inflation in decades. To fight this new nemesis, the Fed must raise rates. Economics: Housing Over the course of three years, the homebuilders ETF lost 82% of its value Can the Housing Boom Withstand Both Higher Rates and Inflation? Two historically distressing conditions are about to hit home buyers: higher mortgage rates and inflation; but will it matter to a red-hot housing market?

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